Continuing liabilities and other fallout from the financial crisis has limited the pool of potential broker-dealer suitors.

While rumors persist about possible suitors for Securities America, Morgan Keegan and other broker-dealers on the market, experts say the pool of buyers has shrunk dramatically over the past few years. For advisors, the longer the sales process take, the more likely it is that advisors will leave, they add.

“There are fewer buyers out there right now,” said Jon Henschen (left), head of Henschen & Associates, a recruiting firm for independent advisors in Marine on St. Croix, Minn., in an interview with AdvisorOne. “There are just not many insurance firms looking for brokers, for instance, since many of them have gotten out of this business.”

This leaves private-equity and venture-capital firms as the primary group of buyers right now, Henschen says. “But the name of the game when you sell a firm is retention,” he explained.

Despite the poor market for broker dealers, the recruiter says Ladenburg Thalmann appears to be at the top of the list of potential suitors for Securities America, which has about 1,800 reps but some lingering legal issues surrounding its sale of private placements. Ladenburg Thalmann is the parent company of Triad Advisors, an independent broker-dealer in Norcross, Ga., with some 600 FAs.

“I’m thinking that Ladenburg Thalmann is probably turning over all the stones to check on potential liability,” said Henschen. “There’s also the issue of whether or not it should bring on Securities America as a stand-alone entity or merge it with Triad. But that [merger] could be an overwhelming task for Triad, since Securities America has so many reps.”

Securities America, which was put up for sale by Ameriprise Financial in late April after the parent company agreed to a tentative $150 million legal settlement with investors, says it cannot comment on its sale process. Calls to Ladenburg Thalmann were not returned Thursday.

Morgan Keegan, which has about 1,200 employee advisors, and its parent company Regions Financial, recently agreed to a $210 million settlement with investors regarding the sale of certain Helios funds. A separate dispute concerning the sale of some $2.2 billion of auction-rate securities was dismissed by a judge in Atlanta on Wednesday, though the SEC says it is considering an appeal.

“It looks like the Morgan Keegan issues are far better contained than the Securities America issues, which makes it more likely that Morgan Keegan could get through the [sales] process” before Securities America does, said Bill McGovern (left), head of B/D Search, a recruiting firm in St. Petersburg, Fla.

Still, while its legal issues may be more limited than those facing other broker-dealers now being shopped, Morgan Keegan doesn’t have an extensive list of possible suitors.

“It is the old -school captive model, with more commissions than fees,” said Chip Roame (left) of Tiburon Stategic Advisors, a consulting firm based in Northern California. “This makes such a deal a backwards step for any progressive [independent-advisor] firms. Plus, Morgan King brings with it an investment bank that is regionally focused. Again, it’s not exactly a fit for many broker-dealers,” though such a deal could make sense for RBC, the consultant added.

Advisor Retention

On the upside, the more limited the legal issues, the higher the likelihood that advisors will remain with the broker-dealer during the sales process, experts say.

“I see more Morgan Keegan reps sticking with the firm until a deal comes through,” shared McGovern. Potential buyers should have an employee model in place and thus “will likely put a retention bonus on the table,” he explained. “This means more Morgan Keegan reps should stick with the firm during the sale process.”

Overall, “Morgan Keegan has been known to have loyal reps that are hard to pull away,” explained Roame.

Still, advisors at both Morgan Keegan and Securities America are being “aggressively recruited,” McGovern said. “I’ll bet each of them has been called by two or three recruiters, especially those targeting independent advisors. There are more recruiters chasing the same people today.”

This may, at least in part, explain why Securities America has been requiring its advisors to give a month’s notice before they depart to a rival broker-dealer since mid-June. “I’ve never seen a broker-dealer enforce this,” said Henschen. “But it’s an attempt to stave off an outflow of assets.”

“Securities America has always had a 30-day termination notice in our advisor agreement, and it has never been an issue,” said Janine Wertheim, a company spokesperson, in a statement. “This provision ensures that all the necessary steps are taken to complete a smooth transition for the advisor and their clients.”

Whether nor not this 30-day notice clause and other measures can stem an outflow of reps before Securities America is sold remains to be seen. Rival broker-dealers, such as LPL Financial, have been offering some Securities America advisors up to 30 to 40% of yearly production as signing bonuses, says Henschen.

“This is about 5 or 10% more than they normally offer and comes in the form of a transition note or a five-year forgivable note that includes certain production targets,” the recruiter explained. Such signing bonuses look more attractive than a 5-15% retention bonus, he points out.

“But this can mean LPL Financial, for instance, will wait a long time to break even on reps it hires, including a group of 30 reps that I hear it is actively recruiting,” added Henschen.

Like many other aspects of the M&A process affecting broker-dealers and advisors today, he notes, the production and other specifications of the recruiting deals can be “very problematic.” “For some advisors, the clauses in the contracts can turn out to be a nightmare,” Henschen shared.